Different Types of Leases on Commercial Property

Different Types of Leases on Commercial Property

Buying and owning commercial property is a great investment, but sometimes buying outright isn’t possible; therefore, leasing is an option that many commercial property investors take advantage of.  If you’re looking into leasing commercial property, there are several types of leases to explore before making a commitment. The INCO Commercial agent working with you will cover these in detail, but we’ve provided an introductory overview of the leases you can expect when looking into the commercial real estate market.

Gross and Net Leases
Two types of lease categories are gross and net leases, and the different subtypes of these leases have to do with the degree of financial responsibility from the lessor and lessee.

Gross Lease / Full Service Lease
The tenant pays only the rent, which is designed to cover all of the expenses the landlord needs to pay on the property. Usually this includes general janitorial services, property maintenance, and utilities as well. However, if the use of any of these may be ‘excessive’ because the  business has a high electricity demand, for example, these charges can fall back on the tenant. The tenant is also responsible for paying their own property insurance and taxes. The rent itself may seem higher than other types of leases, but remember, it’s all-inclusive.

Modified Gross Lease
While the payment is still a lump sum, some of the net payments like pro-rata property taxes, insurance, and CAM fees (Common Area Maintenance) can be included along with the rent. The tenant typically has the ability to negotiate which fees they’ll be paying; it varies whether utilities or janitorial services are included.

NET LEASES
Net leases have a lower base rent, however, the tenant is also responsible for paying part of the expenses associated with running or maintaining the property. The triple net lease is the most common, which is listed first. For example, almost all retail spaces are triple net leases. However, single and double net leases do exist, and are listed below. In the different types of net leases, the tenant assumes more financial responsibility at the next level. In each of these leases, the tenant is responsible for their own utilities and janitorial services.

Triple Net Lease (NNN Lease)
This is the most popular, and a favorable lease among landlords, as the tenant assumes much more of the financial responsibilities. The name refers to the three ‘nets’ the tenant is responsible for paying: net taxes, net building insurance, and net CAM fees, in addition to the base rent.  

Double Net Lease
The tenant is is responsible for the base rent, a share of the building’s property tax, and the property insurance. The landlord still covers other building or operating expenses.

Single Net Lease
The tenant is responsible for the base rent, plus a share of the building’s property tax. The landlord takes on the other operating expenses of the property.

With any of these leases, some of the details to consider include the terms of the security deposit, what kind of signage is your business allowed, clauses specific to co-tenancy, sub-leasing or exit-plans, and what kind of escalations in rent or fees (e.g., CAM fees) may occur.

INCO’s Eye for Detail
Since the specifics of the fees, especially the CAM fees, can vary, the INCO Commercial agent working with you will ensure clarification of all fees, caps, and lease contract terms, and help you determine the best choice based on your requirements and financial circumstances. We will also help you go through the provisions of your lease, and negotiate any adjustments where possible, to maximize your benefit.

Master Lease Agreement
Another type of lease is the master lease agreement. This is basically leasing with the option to purchase, similar to lease-option when pertaining to a single family residence. The master lease agreement can work with most commercial real estate properties that are generating some kind of income, such as apartment buildings, mobile home parks, or retail stores.

The master lease agreement is often favorable to both buyer and seller of the property. In a master lease agreement, the buyer gains equitable title to the property, which means all of the profits and tax benefits go to the buyer. In this arrangement, the buyer is responsible for everything involved with the property: management, maintenance, utilities, taxes, and so on, while the seller remains the legal owner of the property and receives monthly lease payments from the buyer. Another perk for this arrangement is that the banks are not involved in this process; this is beneficial if the buyer has little or no experience or credit, and it’s less risky for the buyer because the title and any loan on the property are still in the seller’s name. The buyer does not need to put money down, and also has the option to purchase the property after an agreed-upon number of years.

The great benefit to the buyer is, again, the profit on the property. After the monthly lease payment and operational expenses are paid, any profit gained goes only to the buyer. If the buyer decides to increase the value on the property with upgrades or improvements, or raises the rents on the tenants – the money from those profits go to the buyer.

The INCO Commercial agent working with you will ensure that all of your bases are covered, and that everything concerning the terms of your lease are clearly understood. Additionally, we will look closely at the type of lease and the terms of the lease in the context of the property. The length of the lease also factors in, and often the most tenant-friendly type of lease is a short-term one, with multiple options for renewal. With this kind of a lease, it’s easier to assess your situation and decide if, at the end of the lease, whether to remain with the space because it serves you well, or if it’s time to move because the space is either too big or too small.

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Our INCO Commercial agents are integral in the process of acquiring or leasing a commercial real estate property. Because our agents have intimate knowledge of the area, they are highly familiar with the history and context of the local market, and which types of properties will best serve our clients needs and requirements.

Let us know when you’re ready to make your move in commercial real estate! We specialize in commercial real estate brokerage, and can help you in the acquisition, leasing, or disposing of a property. Explore the rest of our newly re-designed website, www.incocommercial.com, or find out how to contact us at any one of our three locations, /contact-inco/! We look forward to working with you on your next venture!

2018-12-19T12:43:41-08:00